Why Steel Tariffs Matter

The economic impact will probably be minimal, says Peter Chase. But boy do they throw a wrench into existing trade treaties.

June 4, 2018

Last week, President Trump announced that the tariffs on steel and aluminum imports he’d previewed in March would also affect Canada, Mexico, and the European Union. The move drew intense criticism from leaders abroad. Canadian Prime Minister Justin Trudeau has called the tariffs “insulting,” while the EU trade commissioner favored the term “illegal.” The EU quickly announced retaliatory tariffs.

Some of the most heated rhetoric has come from home. “This is dumb,” said Republican Senator Ben Sasse in a widely quoted response. “Europe, Canada, and Mexico are not China, and you don’t treat allies the same way you treat opponents. We’ve been down this road before—blanket protectionism is a big part of why America had a Great Depression.”

Getting from metal duties to the Great Depression requires a few steps. What, specifically, are the effects of these tariffs likely to be? To the extent that they disrupt global trade conventions, what’s the mechanism?

I asked Peter Chase, a senior fellow in Brussels with the German Marshall Fund specializing in trade and transatlantic relations, for his take on Trump’s first step towards trade war. Though critical of the policy, he pointed not so much to any economic impact as to the longer-term damage this policy might do to existing trade treaties and alliances.

What’s the biggest effect from these new tariffs going to be?

President Trump has decided to impose punitive tariffs on imports of steel and aluminum from a range of countries but specifically from U.S. allies—so Mexico, Canada, Germany, Europe in general. That has lots of effects. Economically, the most important effect is on the competitiveness of all those American industries that use steel. They can buy some steel from U.S. mills but they also need certain specialty steels from European producers and Japanese producers. So that’s the economic consequence, and it will be exacerbated because other countries feel that they need to respond to what we’ve done.

I think the larger impact is on the broader U.S. interest of having allies work with us to address other problems in the world trading system including highly distortive policies from China.

Are you talking about currency manipulation?

China’s state-owned enterprises and forced technology transfer are much worse for the global trading system than the currency manipulation. Washington is alienating our allies on these bigger issues when we do not alone have the power that we need to address them. That’s a big mistake.

Where in the United States do we depend on foreign steel and aluminum imports?

All over. South Carolina, lots of places. Places that use steel for ships, for airplanes, for cars. Steel is not just one thing, it’s a range of different types of products that can be very very high tech. Not everyone can make specific types of steel or aluminum for specific applications. Some things Europeans specialize in and some things U.S. steel mills specialize in.

How much do the tariffs hurt the countries the U.S. is imposing them on?

The single biggest exporter of steel and aluminium to the United States is Canada, followed by Brazil and South Korea. Mexico is fourth. It doesn’t affect China at all, because China’s exports to us have been determined to be unfair and they already have punitive tariffs imposed that predate the Trump administration. This is one of the things that’s striking about this tariff decision. It’s literally only directed at countries who almost everyone in the U.S. would consider to be our allies.

The amount of trade we’re talking, though, is not huge. Economically it affects obviously certain companies in Germany, in Canada, but in terms of the volume of trade, not gigantic.

The problem is more political. Everyone in all of these countries knows that Mr. Trump is slapping them. And it makes it extremely difficult for anyone to say “well, I’ve just been slapped, I’m going to turn the other cheek and I’m going to work with Mr. Trump on our common issues.”

Moreover, they are concerned that the U.S. says “we’re doing this for national security reasons—we need to protect our steel, aluminum and most recently also auto manufacturers for national security reasons,” when there is absolutely no justification for that claim. All those other countries know that if the U.S. claims what appears to be a clear case of protectionism is a national security concern, then what the U.S. is doing is giving every country in the world a justification for saying everything’s national security. That effectively means there is no more law when it comes to trade. That’s the real problem. It’s not the money. It’s the precedent that counts.

When you say “precedent”...

Every single agreement that the U.S. government has negotiated over the last 30 years to open other markets has, at the U.S. government’s insistence, a clause that allows either party to do something for national security reasons. We are a global power. We have to do things that a lot of other countries don’t really have to do, and some of those things may be inconsistent with those treaties, but we’ve always said look, you know us, we will not gratuitously abuse this flexibility that we’re asking for in this treaty. The application will be narrow. But now we’re saying we want to do something that’s clearly economic and say it’s all about national security. So what was a narrowly intended essential flexibility for the United States has now become a gaping hole that you can drive a Mack truck through.

Because that clause is written so broadly, it means that all those treaties are meaningless, and we would not be able to complain against anyone if they said “well I need to protect my ski industry because it’s national security.”

This interview has been edited for length and clarity.

Heather Souvaine Horn is the global affairs editor at The New Republic.